MaeMode Again

Read the following article on MaeMode today, MAE's planned Dutch stake buy gets thumbs-up

• OSK Research Sdn Bhd gave the thumbs-up to Malaysian AE Models Holdings Bhd (MAE)'s planned purchase of up to 40 per cent in Netherlands-based Van Riet Equipment BV (VRE).
  
  MAE, via wholly-owned subsidiary Matromatic Handling Systems (M) Sdn Bhd, had recently signed a Memorandum of Understanding with VRE for the purchase, with an option to buy the remaining 60 per cent stake via a share swap.
  
  The purchase price is to be determined following due diligence. MAE makes material handling systems like conveyor belts and conveyor rollers, among others.
  
  OSK Research said MAE management had indicated that the investment is expected to generate a return on investment of 24-26 per cent.
  
  The price tag is said to be at a price earnings ratio (PER) of about five times, "which is relatively cheap compared with MAE's forward PER of seven times".
  
  "Should the acquisition materialise, MAE will be able to strengthen its core business and to leverage on the technology knowhow of VRE, while VRE could rely on MAE's available manufacturing facilities for its own products," the research firm wrote in a report yesterday.
  
  The deal will be funded by internal funds and bank borrowings.
  
  "We expect the contribution from the acquisition to be mini-mal in fiscal year 2008 and will only start contributing to earnings in fiscal year 2009 by generating an additional RM50 million to RM70 million worth of sales," OSK Research said, maintaining its "buy" call and target price of RM1.84.

Firstly, I would like to reflect what I had written on Maemode before, Reply to Mae, I hope I am not WRONG!, Mae, I hope I am not WRONG! , A look at MaeMode again , MaeMode III, MaeMode Part II and MaeMode

My stance on MaeMode remains. My initial posting MaeMode I had stated the following: "One of the stock earnings that caught my eye was Malaysian AE Models."

Earnings were indeed good but I certainly did not like what I saw inside the company.

For me, using a business-like investing perspective, I saw the debt built-up since April 2007. Back then it was in a net debt position of 157 million.

Two months ago, on Feb 2008, I wrote on the stock again.

I noted the following:

1. The net profit margin is declining. When sales and profit growth is achieved at the expense of profit margins, is this not a reason to be concerned?
2. The company net debt position is on an increasing trend.
3. Trade receivables is increasing on an alarming trend.

And here is the table of what I saw.

So despite all the earnings, underneath it all, this company doesn't look fundamentally strong at all.

So now this Dutch VRE deal.

Firstly, I am shocked not to see no price tag mentioned in the article. Yes, on hand, this deal should probably generate more earnings for MaeMode so I decided to check Bursa website.

MALAYSIAN AE MODELS HOLDINGS BERHAD ("MAE" or "the Company") -MEMORANDUM OF UNDERSTANDING BETWEEN MATROMATIC HANDLING SYSTEMS (M) SDN BHD, A WHOLLY-OWNED SUBSIDIARY OF MAE, AND VAN RIET EQUIPMENT BV

• 1. INTRODUCTION
  
  The Board of Directors of MAE is pleased to announce that Matromatic Handling Systems (M) Sdn Bhd ("MHS"), a wholly-owned subsidiary of the Company, had on 2 April 2008 entered into a Memorandum of Understanding (“MOU”) with Van Riet Equipment BV (“VRE”) for the purchase of up to forty per cent (40%) of the enlarged share capital of VRE.
  
  2. THE MOU
  
  2.1 Information on Van Riet Equipment BV
  
  VRE is a company incorporated in the Netherlands having its registered address at Groningenhaven 2, 3433 PE Nieuwegein, Utrecht, Netherlands. VRE's main business activities are in the business of materials handling systems integration, especially on the software and designing of the Logistic Distribution Centre and high speed sortation systems.
  
  2.2 Salient Terms of the MOU
  
  (a) Purchase Consideration
  
  The purchase price to be determined by due diligence carried out by an Independent Accounting Firm to be mutually agreed upon by both parties and subject to the terms and conditions hereinafter contained. The results of the Independent Accounting Firm will be presented to the shareholders of both parties for their respective decisions.
  
  (b) Mode of Payment
  
  MHS shall pay to VRE upon issuance of the new share certificate by VRE.
  
  (c) Shareholders Agreements
  
  This MOU will be superseded by a Sale and Purchase Agreement, a Shareholders Agreement between all new and existing shareholders of VRE and a new Shareholder Agreement between VRE and Aemnic Corporation (M) Sdn Bhd. All these documents will have to be formalised and agreed upon between both parties before the transfer of the shares can be effected. All parties will endeavor to execute all these documents within 2 months or such other date as may be mutually agreed upon by both parties.
  
  (d) Governing Law
  
  This MOU shall be governed by the laws of Malaysia and its validity, construction and performance shall be interpreted in accordance with the laws of Malaysia.
  
  
  3. CONDITIONS OF THE MOU
  
  The MOU is not subject to the approval of the shareholders of MAE or any relevant authorities.
  
  4. DIRECTORS’ AND SUBSTANTIAL SHAREHOLDERS’ INTERESTS
  
  None of the directors and/or substantial shareholders of MAE or persons connected with them has any interest, direct or indirect, in the MOU.
  
  5. STATEMENT BY DIRECTORS
  
  The Board of Directors of MAE is of the opinion that the entry into the MOU is in the best interest of MAE group.
  
  6. COMPLIANCE WITH THE SECURITIES COMMISSION’S POLICIES AND GUIDELINES ON ISSUE/OFFER OF SECURITIES (“SC GUIDELINES”)
  
  The signing of the MOU does not fall within the ambit of the SC Guidelines.

Rather lacking in details yes?

And more worrying, as OSK mentioned, this deal would be financed by internal funds and bank borrowings.

Currently, as can be seen in the tables above, MaeMode does not have tons of cash. Instead it had tons of borrowings.

And now it wants to borrow more.

How?

Not a good way to manage a company in a profitable manner, yes? Can a company continue to borrow and borrow and borrow?

Would I give this deal a thumbs-up?

Would you?